Different Approaches to How Funds are Deemed Ethical

Each fund sets out its own criteria how it makes investments. The majority of funds focus on a form of screening, while others put in place mechanisms to change ethical stance and performance of companies in which they may invest:

Negative Screening (Exclusion Criteria)

This usually involves avoiding companies that do not meet the ethical standards that are set by the SRI fund (i.e. tobacco production/fossil fuel production) or are known to have a negative social or environmental effect. It is generally the most commonly recognised form of ethical fund.

A number of funds operate according to very strong principles and exclude a large proportion of companies that do not meet the ethical standards that are set by the SRI fund, often excluding a significant proportion of the stock market as a result. Instead, they tend to invest in small and medium-sized companies who, even though are higher in risk in the short-term often show better performance over the long-term.

Typical Areas of Negative Screening:

Poor employment practices

Arms trade and nuclear weapons

Animal exploitation

Human Rights Abuse

Oppressive political regimes

Environmentally damaging products or practices

Pornography

Alcohol and Tobacco

Gambling

Positive Screening takes a more proactive approach in that it tries to identify those companies with a positive commitment to ethical or responsible practices which are in line with the standards set by the SRI fund. These commitments can vary and be made in the commitment towards principles such as environmental sustainability, evidence of investment in community programmes, ethical supply chain management in developing nations or investment in environmental technology innovations.

Some engagement approaches are applied by fund managers to encourage more responsible business practices (in fields such as oil and mining) and usually takes the form of dialogue between major investors and companies to ascertain how they will be managing their future development. They will also work to influence company policy in line with the standards set by the SRI. This approach is also known as active shareholding.

Typical Areas of Positive Screening:

Ethical employment practices

Environmental protection and innovation

Conservation and recycling

Safety and security

Pollution control or reduction

Most ethical funds will make assessments based on both approaches by firstly applying negative selection to exclude companies which conflict with certain ethical standards, after which a positive vetting process is undertaken to fine tune the selection.

When it comes to finding the right fund and/or fund manager to match your own ethical values, a discussion with a specialist independent financial adviser who has knowledge and experience in this area is essential. A number of fund managers now have teams dedicated to looking at SRIs. Some examples include Legal & General, Norwich Union, Jupiter and Standard Life.

“You might be surprised what is actually allowed in an ethical fund, says Mark Hoskin, specialist ethical and environmental independent financial adviser (IFA) at Holden & Partners. “Most ethical funds’ top 10 holdings are surprisingly mainstream, with names like Vodafone and Royal Bank of Scotland occurring time and again,” he says. “Many also have holdings in large mining corporations, plus BP, Shell, Total and other oil majors.”

Finding the right fund for you is not always a straight forward decision and not all funds cater for everyone as they maintain a varied stance on many ethical issues. It may be that you are someone who is keen to safeguard the environment and against nuclear energy yet for many ethical investors, nuclear energy is the right choice to answer the issue of climate change. Also why choose a fund which does not support the alcohol industry when you like nothing more than a glass of wine in the evening. These are all personal dilemmas that need to be resolved before you can feel comfortable with the fund of your choice.

The first ethical investment fund in the UK was launched in 1984 by Friends Provident, largely as a result of their founders historical roots in the Quaker movement.

Today there are thousands of schemes that provide a wide range of funds and schemes for potential investors to get involved in. The concept of what is ethical will no doubt vary, however across the spectrum of investment opportunities, there are certain key moral issues  that have broad appeal across all investors. Outside of that there are opportunities and scope to impress a more individual impression on an individual’s ethical investment though these opportunities are not usually open to the mainstream investor.

This isn’t to say that ethical investing is all about investing in companies or organisations that are morally acceptable to society. Most ethical funds would balance the ethically positive with the ethically neutral. Whilst this isn’t the perfect solution as far as ethical investors are concerned, it’s comparison with non-ethical funds would demonstrate a significantly more beneficial outcome than could otherwise be achieved. A step in the right direction. Investors are happy to understand that a balanced approach to fund investment is needed if beneficial returns and scope are to be sought.

By taking a stand in this way and championing the cause to the investment community will only help to serve a precedence for others to follow and market forces will eventually lead to development of ethical funds that could be said to be truly ethical.

The basis of our financial investment system is the pursuit of quick profit. There’s nothing wrong in making money but to do so within the framework of the important principles which shape our morality and way of life is fast becoming a dominant consideration in today’s investor. As a result, ethical investment is now becoming one of the fastest growing areas in financial planning.

As more people become more aware of how their investments impact their wider environment, we only see this trend growing. Greater co-operation between campaign groups and fund managers demonstrate the potential for ethical  investment funds to play a bigger mainstream part in the financial planning world.

Recent fund performance has also demonstrated that investing ethically does not negatively affect investment performance, moreover it can often provide surprisingly decent returns.

It is estimated by the Ethical Investment Research Service (EIRIS) that over 700 000 people in the UK have now invested in ethical investment funds.

With over 100 UK ethical funds now available with a value in the region of £9 billion, it is clear that the voice of ethical investors are finally being heard and the practice is quickly becoming part of the mainstream financial planning industry.

Ethical Investment can usually incorporate a variety of different types of investments and financial services that place particular emphasis on fulfilling ethical, social and environmental objectives.

These types of investments, also known as socially responsible investments (SRI) provide an alternative financial vehicle for investment through which consumers can advance positive social and environmental goals while achieving financial returns.

Socially responsible investment funds generally encompass either ethical or green/environmental concerns. Ethical funds are administered in accordance with a wide range of ethical criteria and often exclude morally dubious concerns (i.e. the arms trade, tobacco). Environmental funds place investment in organisations whose ethos, products and processes adhere to practices aimed at the maintenance, improvement or renewal of the ecology.

Ethical investment can also take advantage of the growing social and economic benefits that are bestowed on ethical and environmental initiatives, such as government regulation towards carbon emissions and the growing need for cleaner sources of renewable energy. It must be foreseen that government initiatives to control climate change will only continue to impact on those companies which continue to damage the environment.

The vast majority of the public are unaware of how exactly their long-term savings are invested and many maybe, albeit unwittingly, indirectly helping to finance arms manufacturers, companies who are destroying the environment or organisations known for human rights abuse simply as a result of everyday investments performed through their bank accounts, savings, pensions or life insurance schemes.

Such companies will often draw upon the financial resources of the very same institutions that we invest in. It therefore begs the question, how can today’s investor really be sure that they are not investing in dubious activities and what can they do to safeguard against it. Today’s modern consumer is far more aware of its role in the global affairs and the impact it has on the wider world (through issues such as child labour) and this ever growing responsibility has begun to extend itself into the financial investment space.

These are important questions, and every day hundreds of thousands of people who do not apply ethical or social screening to their money are allowing their funds to be used to finance companies and projects they do not support.

The core issue stems from the fact that when consumers put their money into long-term investments such as savings schemes, pensions or life assurance schemes, those payments are invested into fund investments along with the payments of millions of others and invested in a variety of stocks on the stock market. We place trust in those institutional investors to provide us with the best returns possible and therefore the consideration for how we fulfil our ethical obligations is often left as an afterthought.

However, as a result of our financial systems being geared towards perpetual asset growth as well as being optimised towards making the quick buck, we have seemed to have lost sight of the fact that mathematically it is simply impossible to achieve continuous growth within the limits of our planets finite resources and ever growing population. More and more economic and social commentators are beginning to see a widening gap in societies quality of life and its economic performance.

The standard economic models tend only to work towards growth plans over a relatively short periods of time because they tend to lose statistical certainly over the long-term. It is also generally harder to apply those models to socio-demographic changes or environmental changes with any degree of certainty.  Moreover, our human nature is such that we find it hard to properly quantify or envisage the long-term effect of our actions. The end effect is that too much living in the now means that we now have to consider dire consequences for the future of our children and grandchildren.

Ethical Investments provides an alternative for investors to make a difference and support those initiatives and organisations which are designed to prolong the longevity of our social aims and objectives or which work within the moral framework of an organisation that shares those social and ethically responsible principles.

This is a loose term to define but one ultimately driven by the conscience of the investor and by their faith in organisations and investment models that share a wider objective that the short-termism of the standard quick win economic models.